Non-recognition gives Kosovo a headache

It is 11 years since Kosovo declared independence from Serbia, and even now, only about half of the UN recognizes it as a free-standing sovereign state. That lack of international validation – not least the absence of a credit rating – is holding back a strong economy.

Visit Pristina in summer and it’s hard to believe Kosovo has any serious economic problems. Stylish coffee bars and restaurants are packed with well-dressed customers. Expensive SUVs clog the highways. Teenagers in a supermarket pay for chocolates and cigarettes with a €100 note.

At first sight, the Balkan state’s numbers also look pretty good. Kosovo ranks 44th in the World Bank’s Doing Business report. Its economy has been growing by more than 4% a year since 2015. At 17%, the public debt-to-GDP ratio is the lowest in the region. Nearly a third of the population of 1.8 million is under 30.

But all is not quite as it seems. Take a closer look at the Pristina traffic, and the larger cars all have foreign number plates. Many of the Kosovan diners and drinkers are chatting in English or German. This summer bonanza, like much of the Kosovan economy, is funded by the country’s diaspora. Driven out by war and economic necessity, nearly 800,000 Kosovars live and work outside their home country, mostly in Germany and Switzerland.

Not only do they send €750 million to €800 million home a year through official channels, equivalent to around 13% of Kosovo’s GDP, they also bring wads of cash to distribute to relatives during holiday visits.

The economic numbers also look less good on closer inspection. Unemployment is close to 30%. Foreign direct investment averages barely 3% of GDP a year. Even the much-vaunted GDP growth figures are misleading, according to one banker in Pristina.

“Everyone likes to say that Kosovo is growing well – but they forget that we’re a long way behind here, compared with other countries in the region,” he says.

Twenty years after the war, we’ve got used to the problems associated with non-recognition. People don’t make a fuss, they say it’s fine. It’s not fine, and it’s foolish to deny it

- Senior Pristina-based banker

Twenty years after the end of the Kosovan war and 11 years after unilaterally declaring independence from Serbia, what is holding the country’s economy back? Does it have anything to do with the fact that Kosovo is still not recognized by nearly half of the United Nations member states, including Security Council members Russia and China?

Depending on who you speak to in Pristina, there are very different answers to that question. Some senior government officials, perhaps reluctant to say anything that could worsen negative perceptions of Kosovo, insist that lack of recognition has little or no impact on the economy.

“It hasn’t been an issue globally for Kosovo,” says Lulzim Rafuna, adviser to the minister of finance. “We have lots of imports from China. The ideal is to be recognized, but not being recognized is no barrier to free trade.”

The optimists point to Kosovo’s membership of the IMF and the European Bank for Reconstruction and Development, the generous funding from western institutions that has poured into the country since the end of the war, and that its banks are connected to the Swift, Visa and Mastercard networks.

“In terms of economic development and attraction of FDI, Kosovo hasn’t faced any major problems,” says a government official. “There is list of minor issues that people struggle with, but it’s been the same for 20 years, so we’re quite used to it.”

Another makes a joke of it.

“As long as we’re in Fifa and UEFA, and can play international football, it means nothing!” he says.

Lost opportunities

Others tell a very different story, one of lost opportunities, isolation and everyday inconvenience.

At the most mundane level, the fact that Kosovo is not included in lists of countries by many international companies is a constant source of small annoyance.

Post and deliveries from abroad often have to be addressed to Albania, where the locals are happy to redirect them. If marked for Kosovo, they will likely be delivered to Serbia and never seen again.

A recent appointee to one of the international embassies in Kosovo reportedly had to retrieve their furniture from a random country starting with A. The delivery firm didn’t recognize Kosovo, so defaulted to the start of the alphabet.

PayPal can be used by Kosovan citizens but not by local businesses. Ardian Arifaj, adviser to president Hashim Thaci, asked a local firm selling wedding dresses online, mainly to Arab countries and Africa, how the government could help them grow their business.

Ardian Arifaj, adviser to Kosovo president Hashim Thaci

“They said their biggest problem is receiving payments from abroad, because banks in Africa don’t recognize Kosovo and they can’t take payments through PayPal,” he says.

The head of a local non-governmental organization recently discovered that, while Airbnb allows users registered in Kosovo to list accommodation, they can’t list ‘experiences’ by location.

Fund-raising platform globalgiving.com also required weeks of negotiation and paperwork before agreeing to include Kosovo in its country list.

Apple is another non-recognizer. You can’t check the weather for Pristina on an iPhone. More importantly, when Kosovo’s power distribution company developed an app to allow diaspora members to pay electricity bills from abroad, it took eight months of negotiation to get it included in the App Store.

Then there is the issue of phone numbers. For eight years after independence, Kosovo was not allowed its own dialling code. Mobile users with national operator Vala therefore had a Monaco number, after the principality won a tender to allow the use of its code for an annual fee. Customers of Slovenian-owned IPKO, on the other hand, had a Slovenian number, while Kosovan landlines still used the 381 dialling code inherited by Serbia from the Yugoslav era.

Kosovo was finally allocated its own code by the International Telecommunication Union in December 2016, but it is still not recognized by many international mobile operators. In an era of two-factor authentication, this often results in exasperating delays.

“It means daily headaches like not being able to receive a code to log into your online accounts,” says one local.

It is also apparently the reason why many foreigners visiting Pristina are unable to get network services. Euromoney can vouch for the fact that at least one big UK mobile operator doesn’t have a roaming agreement with Kosovo.

To most of these problems, Kosovars find solutions – but, as Arifaj points out, it adds another layer of complexity.

“We have to work with each company individually to get things changed,” he says.

One senior Pristina-based banker puts it more bluntly.

“Twenty years after the war, we’ve got used to the problems associated with non-recognition,” he says. “People don’t make a fuss, they say it’s fine. It’s not fine, and it’s foolish to deny it.”

Downtown Pristina. Expats call the city claustrophobic

Workarounds

At a country level, Kosovo also has to find workarounds. Being excluded from the UN complicates negotiations with other international organizations.

“The first thing they ask is whether you’re a UN member,” says Arifaj. “If you are, they accept you automatically. If not, you have to go through a lengthy procedure of convincing them to accept you.”

This means Kosovo has to negotiate with each organization individually, and very often the final decision has more to do with geopolitics than local realities.

“If the west is powerful in that organization, we will be admitted,” says Arifaj. “If Russia has more allies, we won’t.”

Serbia and its backers – which include countries with their own separatist regions, as well as traditional opponents of the west – have managed to get Kosovo excluded from everything from Unesco and Interpol to the European Network of Transmission System Operators for Electricity (Entso-E).

Last year, the dispute over Kosovo’s membership of Entso-E made international headlines when Serbia’s refusal to compensate for a power shortfall in its former province – for which it is still officially responsible – caused digital clocks on microwaves and radios in 26 European countries to lose time.

For most of the continent, this was little more than a quirky news story, but it was a serious business for Kosovo, which has always struggled to ensure reliable electricity. Cut off from Entso-E, the country is dependent on domestic supply from very old coal-powered plants.

A 400-kilovolt power transmission line to Albania, financed by German development bank KfW and completed in 2016, was supposed to help fill the gap. Unfortunately, Albania’s entry into Entso-E the following year meant the line could not be used.

This means the only way for Kosovan institutions to make up local shortfalls is by buying electricity at exorbitant prices from the few traders that do business in the country. Outages are less common than they used to be, but one business visited by Euromoney was in the middle of a power cut.

China’s refusal to recognize Kosovo means the country is also excluded from the Belt and Road Initiative. It is the only Balkan state not included in the 16+1 format, Beijing’s talking shop for central and eastern Europe, and the only one shut off from the recent wave of Chinese infrastructure investment in the region.

There is an urgent need for infrastructure investment here. Kosovo was very underinvested, even in Yugoslav times

- Neil Taylor, EBRD

Given the controversy about some Beijing-backed projects in the Balkans, such as Montenegro’s Bar-Boljare highway, some might see this as a blessing. Kosovan officials certainly seem to think it’s fairly irrelevant.

“As long as we have the US on our side, we don’t need China,” says one.

Others are less sanguine.

“Leaving aside a broader discussion around the Belt and Road Initiative, it’s a shame that investment in infrastructure is happening and Kosovo has not benefited from it,” says Neil Taylor, country head for Kosovo at the EBRD. “There is an urgent need for infrastructure investment here. Kosovo was very underinvested, even in Yugoslav times.”

Neil Taylor, country head for Kosovo at the EBRD

On the transport side, at least, some progress has been made. Kosovo has good road links with Albania, including the port of Durres, and July saw the opening of a new highway to the border with North Macedonia. Work has also finally started this year on upgrading Kosovo’s dilapidated rail network, four years after the EBRD and European Investment Bank committed €80 million to the project. The first phase will see the line to North Macedonia modernized.

Such links are crucial for Kosovan exporters, which are blocked from using the main overland routes to the north through Serbia. Again, as a local banker points out, this means more cumbersome workarounds.

“Companies find ways around the transport issue,” he says. “But it all costs time and money.”

Investment barriers

Lack of access to the Serbian market also acts as a brake on FDI.

“Businesses that invest in Kosovo don’t just come for the local market, they want to serve the whole of the western Balkans,” says Rafuna.

On occasion, Serbia has played a more active role in deterring investment in Kosovo. In April 2015, a French consortium signed a contract with the Kosovan government to redevelop Brezovica, a popular socialist-era ski resort that fell into disuse after the break-up of Yugoslavia.

The plan was to invest €350 million over 17 years, starting with an initial €35 million investment. Unfortunately for Kosovo, it was abandoned after the Serbian government warned members of the consortium that it still considered Brezovica to be its property.

Another knock-on effect of the standoff with Serbia is the limitation it places on foreign travel. Many of the non-recognizers, including India and a clutch of African countries, refuse to accept Kosovan passports.

Some Pristina locals dismiss this as irrelevant.

“Who wants to go to India anyway?” says one tech worker.

What Kosovars care about deeply are the restrictions on travel to the European Union. Kosovo is the only country in the western Balkans that has not been granted visa liberalization by the bloc, despite meeting all the criteria set by Brussels. This is a very sore point locally.

“Visa liberalization was the first test for both sides, Kosovo and the EU,” says Lulzim. “The delay doesn’t encourage the young generation to trust in the EU integration process.”

Arifaj agrees.

“It sends a very bad signal to everyone in Kosovo, especially since here we are still in the identity-building phase,” he says. “One of the questions we face is, where does Kosovo belong. We want to be part of Nato and the EU, but the message from the EU is: ‘You don’t belong here, you’re not good enough to be in our club’.”

Unfortunately for Kosovo, it still has some determined opponents within the EU. Five countries in the bloc have refused to recognize the state, although four – Greece, Cyprus, Romania and Slovakia – have softened their initial stance and permit entry to Kosovars.

Spain, with its own Catalan and Basque separatists in mind, remains implacably opposed to any form of recognition for Kosovo. Kosovars lucky enough to get a Schengen visa find the small print includes an outright ban on travel to Spain.

Even with friendly EU countries, the visa application process is lengthy and onerous. Getting a three-day visa to attend a conference in Germany can take weeks. Kosovars describe feeling trapped.

“Pristina is a very claustrophobic place,” says a young Kosovar studying in the UK.

Lack of EU recognition also imposes another barrier on would-be Kosovan exporters. Food producers can’t get certification to sell into the bloc, while even manufacturers of furniture – Kosovo’s other specialism – have to navigate lengthy paper trails.

What we need to do today is create a large mass of people who are digitally literate and can solve the world’s problems by using tools in Kosovo

- Uranik Begu, Innovation Centre Kosovo

As a result, the ratio of imports to exports for Kosovo is nine to one.

“We import everything,” says a local banker. “If we had recognition, within one year our exports could double. In normal circumstances our companies should be super-competitive to markets like Austria, Poland, Bulgaria and Romania.”

In the meantime, some see Kosovo’s young tech sector as an answer to the problems of economic and social isolation. The industry is already growing fast, thanks to Kosovo’s combination – unique in the Balkans – of excellent internet penetration and a young, multilingual population.

In the Innovation Centre Kosovo (ICK), a non-profit hub in Pristina that offers training and support to tech workers and startups, Euromoney meets a team of local women in their 20s developing mobile apps for a Canadian e-commerce company. Another 200 of the centre’s occupants work for tech firms in countries such as the US and Germany.

Raiffeisen Bank International has also tapped into the local tech talent pool. Two years ago, the Austrian group – which owns the largest bank in Kosovo – chose Pristina as the venue for a competence centre providing IT support to its 14-country network.

ICK director Uranik Begu sees this as the future for Kosovo.

“Our sector gives the opportunity to work from anywhere in the world, 24/7,” he says. “What we need to do today is create a large mass of people who are digitally literate and can solve the world’s problems by using tools in Kosovo.”

As the EBRD’s Taylor points out, however, even tech entrepreneurs need to travel.

“There are successful companies in Kosovo that are exporting services, but they can’t readily travel to meet clients and do more business,” he says. “Lack of visa liberalization becomes a block on future growth.”

Mass exodus

One local executive is also sceptical that the tech sector can be the answer to all Kosovo’s problems. “All the young people in this country are not IT geeks,” he says. “The fact that you have a smartphone doesn’t mean you can programme and create apps. And we can’t eat apps and sleep on apps.”

The other big question is whether or not, if the EU eventually grants visa liberalization to Kosovo, it will prompt a mass exodus from the country. Certainly, many of those who can get permits to work in Europe – whether as tech specialists, plumbers or construction workers – have already left.

Local firms and policymakers are pinning their hopes on the fact that life in the EU can fail to live up to expectations. Higher taxes and living expenses eat up much of the extra salary workers can earn in countries such as Germany, while northern European culture can come as a shock to family-oriented and gregarious Kosovars.

A young local who works in Scandinavia says in horror: “All they do is sit in their houses by themselves and stare at a lake.”

Nevertheless, despite the risks of mass emigration and the resentment roused by the EU’s refusal to deliver on visa liberalization commitments, Kosovars all agree that their future lies in the bloc.

“We are part of Europe geographically and we should be integrated politically,” says Rafuna. “Kosovo doesn’t have a plan B. There is only plan A, which is EU integration.”

Unfortunately, the EU has made it clear that further progress on that front will depend on the normalization of relations with Serbia – something that, as of this summer, seemed almost as far away as ever. Late last year, in retaliation for what Kosovars claim was a concerted campaign by Serbia to get their third bid for Interpol membership rejected, policymakers in Pristina introduced 100% tariffs on imports from Serbia.

Ramush Haradinaj resigned as Kosovo's prime minister in July after being summoned

These contravened regional trade agreements and prompted strong condemnation from Europe and the US. Nevertheless, Kosovo’s government has refused to back down. Until this year, Kosovo imported around €500 million of goods from Serbia annually. Some locals in Pristina support the tariffs.

“Serbia has never had to pay for any of the damage it has done to us,” says one. “It’s high time they did.”

Others see it as another knock to Kosovo’s already shaky international reputation.

“This import tax has set back again the perception of our ability to compromise and be a mature, grown-up government,” says a senior Pristina executive.

Rafuna agrees that maintaining dialogue with Serbia is essential if Kosovo is not to be left behind in terms of regional integration and development. Unfortunately, progress on this and other issues is hampered by Kosovo’s chaotic politics. No recent government has seen out its full four-year term.

The current administration had been in place for less than two years when, in July, prime minister Ramush Haradinaj resigned after being summoned to a Hague-based special court for questioning about alleged war crimes by separatist Kosovan Liberation Army (KLA) fighters during and after the 1998/99 war – charges he has been acquitted of on two previous occasions.

Elections have been scheduled for October 6.

This lack of political stability does nothing to help Kosovo’s cause with potential investors, say officials. It may also explain Kosovo’s repeated failure to obtain a sovereign credit rating, something local bankers in particular have been lobbying for heavily for years.

“Not having one affects our rating on a whole range of other things, as well as our ability to raise funds if we need it as an industry,” says Robert Wright, chief executive of Raiffeisen Kosovo. “It enhances negative images of Kosovo and feeds into a broader perception that we’re not normal, that we’re still not a proper country.”

Rumour has it Kosovo did get a credit rating some years ago, but it failed to meet policymakers’ expectations and was suppressed.

“The problem is that no politician wants to be the one to announce a low rating,” says one local banker. “But you have to start somewhere. It’s better to have a triple-C rating than nothing.”

Money was allocated in this year’s budget for obtaining a rating, but whether or not the plans will survive the summer’s political upheavals remains to be seen. Changes of government in Kosovo are traditionally marked by a clear out of senior management at both ministries and the central bank.

At the same time, the key figures in Kosovan politics have changed little over the last two decades. Former KLA leaders – including Thaci and Haradinaj – continue to dominate the main political parties.

“The people in power need to move on, but many of them are still living in the past,” says a local. “It would be good to have a freshening of faces.”

Magazine

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.